How many credit cards should I have?

My father lived a debt-free life, but considered withdrawal from Provident Fund to be okay.

We have come a long way since then. Indians still do not leverage future income as much as the Americans do, but the trend is unmistakable.

How do I buy that fancy car or my dream home? A loan is de-rigueur, and I need a good credit score to be eligible for the loan.

Where exactly does the credit cycle start in an average Indian’s life? It may be an education loan for a small section. The majority starts with a credit card application. A credit card may be sold to many of you with the promise of no annual fee, even if it is free only for the first year.

HOW GOOD OR BAD IS A CREDIT CARD?

As long as one pays the bills on or before due date, one can enjoy 15-50 days credit at zero interest. It’s all good…

…..till you pay the minimum amount due at a certain point of time, and avail of the revolving credit facility on offer. 

The interest meter starts ticking at the rate of 40%- 46% p.a.

No wonder, credit cards are feared gremlins in debt management plans.

HOW MANY CREDIT CARDS SHOULD I HAVE?

One is fundamental. Two are good, and 3-4 demonstrate your creditworthiness – as long as you do not overstep credit limits.

Some people may use each credit card for a different purpose – like member cards for travel or shopping, fuel cards, corporate cards for entertaining clients. They need to be a pro at utilising rewards points, and all’s good in card-spend and financial planning lands.

WHAT ARE DYNAMIC INTEREST RATES?

IDFC First Bank has just introduced the concept in a market-first product.

Credit card interest rates as low as 9%, goes the marketing punch.

Let us take a closer look.

When you apply for a credit card with IDFC First Bank, you will not know the applicable rate of interest.

The bank will do a due diligence on your 

  • Credit scores
  • Spending behaviour
  • Risk profile
  • Relationship value with IDFC First Bank (amount placed in savings and fixed deposits, other loan accounts etc)

The interest rate at which the credit card is being given will be conveyed to you. It can be in the range of 9% p.a. – 36% p.a.

The interest rate can change depending on your spending behaviour. In short, good financial behaviour is rewarded.

It is similar to floating rates of interest on home loans.

The interest rate applicable to you and your colleague or friend, who applied for and got a credit card at the same time can be different.

WHAT HAPPENS IF YOU PAY FULL AMOUNT OF BILLS ON THE DUE DATE?

It is like any other credit card.

credit card limits

HOW DOES THE DYNAMIC RATE OF INTEREST HELP YOU?

If you fall in the favoured category at 9%, and you need to revolve credit for some reason, you can  get money at a lower rate of interest.

If you are repaying a small left-over amount of a personal or education loan running at a higher rate of interest, to close the loan, this card might help.

However, if you are making a purchase which the seller offers at zero interest, this credit card with dynamic rate of interest is not of much use.

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SHOULD YOU CLOSE CREDIT CARDS NOT IN USE?

No. Credit cards help in building your credit score. So let those continue.

I CUT OFF MY CREDIT CARD TO REMAIN DEBT-FREE IN THE POST COVID19 ECONOMY…

The annual charges will be debited to your account, and will start attracting interest if the amount remains unpaid.

It does not help.

HOW IS MY AVAILABLE CREDIT LIMIT COMPUTED?

If your credit limit is INR 2,00,000, and you have used INR 50,000, the available credit limit is INR 1,50,000. As and when repayments are made and credits are received in the account, your available credit limit starts increasing.

High available credit limits show you in a favourable light. It proves that you are not desperate. The next lending institution will give you brownie points for this.

I MAXXED OUT MY CREDIT LIMITS. CAN I SPEND MORE?

Normally, the transaction will fail. 

You can apply for enhancement in credit limit. If the request is rejected, pay attention to the reasons given. It will highlight the areas where your financial behaviour needs improvement.

DOES A FAMILY MEMBER’S LOW CREDIT SCORE IMPACT MINE?

No, unless you happen to be a co-borrower in the loan account.

DO I SEE THE SAME CREDIT REPORT THAT A LENDER DOES?

No. A lender gets a much more detailed report, and has the mechanism to interpret those before taking a decision.

I REPAID THE OUTSTANDING AMOUNT IN MY LOAN ACCOUNT. WILL IT REVERSE THE NEGATIVE IMPACT ON MY CREDIT SCORE?

Past history will remain on records. It does not get erased. Your credit score may gradually improve, but the impact will remain.

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